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E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

  1. Fair value changes are not recognized in the accounting records.
  2. Financial information is presented so that investors will not be misled.
  3. Intangible assets are amortized over periods benefited.
  4. Agricultural companies use fair value for purposes of valuing crops.
  5. Each enterprise is kept as a unit distinct from its owner or owners.
  6. All significant post-balance-sheet events are disclosed.
  7. Revenue is recorded when the product is delivered.
  8. All important aspects of bond indentures are presented in financial statements.
  9. Rationale for accrual accounting.
  10. The use of consolidated statements is justified.
  11. Reporting must be done at defined time intervals.
  12. An allowance for doubtful accounts is established.
  13. Goodwill is recorded only at time of purchase.
  14. A company charges its sales commission costs to expense

Short Answer

Expert verified

Under the study of financial reporting, theconceptual framework hasassumptions, principles, and constraintsas the three basic criteria forrecognition and measurement.

Step by step solution

01

Meaning of conceptual framework

Theconceptual frameworkis the source of information that guides the members in understanding the main purpose behind the specific accounting standard.

02

Explanation for Part (a)

  • TheMeasurement principle will be the correct answer. Fair value changes are not recognized in the accounting records to avoid subjectivity in the information being presented to the users.
03

Explanation for Part (b)

  • Thefull disclosure principle will be the correct answer. Financial information will be presented to the users so that the investors can make better decisions and will not be misled.
04

Explanation for Part (c)

  • Theexpense recognition principle will be the correct answer. Amortization of intangible assets is recorded as an expense over the period befitted; this helps to match the expenses incurred with the revenue generated.
05

Explanation for Part (d)

  • Themeasurement principle will be the correct answer. Agricultural companies use fair value to value crops because the price of crops is readily available in the market.
06

Explanation for Part (e)

  • Theeconomic entity assumption will be the correct answer since each enterprise is kept as a unit separate from its owner(s) for establishing accountability.
07

Explanation for Part (f)

  • Thefull disclosure principle will be the correct answer. Under which all significant post-balance-sheet events are disclosed to ensure a fair presentation.
08

Explanation for Part (g)

  • Therevenue recognition principlewill be the correct answer. Revenue is recognized when the product is delivered, i.e., when the obligation to make sales is satisfied.
09

Explanation for Part (h)

  • Thefull disclosure principlewill be the correct answer. All important aspects of bond indentures are presented in financial statements in order to ensure full disclosure of information.
10

Explanation for Part (i)

  • Theexpense recognition principle will be the correct answer. The rationale for accrual accounting is that all expenses should be recorded on an accrual basis so that the prudent investor is not misled.
11

Explanation for Part (j)

  • Theeconomic entity assumption will be the correct answer. Consolidated financial statements are appropriate and used as justifying since the entire entity is considered a separate unit.
12

Explanation for Part (k)

  • Theperiodicity assumption will be the correct answer. Reporting is to be done at defined time intervals so the business entity can compare the results of one period with those of another.
13

Explanation for Part (l)

  • The expense recognitionprinciple will be the correct answer. An allowance for doubtful accounts is established to provide a fair estimation of realizable value from the debtors.
14

Explanation for Part (m)

  • Themeasurement principle will be the correct answer. Goodwill is recorded only at the time of purchase because estimating the fair value of self-generated goodwill is subjective.
15

Explanation for Part (n)

  • The expense recognition principle will be the correct answer. The sales commission cost is an expense because it is necessary to make the required sales.

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Most popular questions from this chapter

Describe the basic assumptions of accounting.

Question: The issues that the FASB and IASB must address in developing a conceptual framework include all of the following except:

(a) should the characteristic of relevance be traded-off in favor of information that is verifiable?

(b) should a single measurement method such as historical cost be used?

(c) what are the key elements of asset and liability definitions?

(d) should the role of financial reporting focus on internal decision-making as well as providing information to assist users in decision-making?

Question: For each item below, indicate to which category of elements of financial statements it belongs.

(a) Retained earnings (f) Loss on sale of equipment

(b) Sales (g) Interest payable

(c) Additional paid-in capital (h) Dividends

(d) Inventory (i) Gain on sale of investment

(e) Depreciation (j) Issuance of common stock

Question: Daniel Barenboim sells and erects shell houses, that is, frame structures that are completely finished on the outside but are unfinished on the inside except for flooring, partition studding, and ceiling joists. Shell houses are sold chiefly to customers who are handy with tools and who have time to do the interior wiring, plumbing, wall completion and finishing, and other work necessary to make the shell houses liveable dwellings.Barenboim buys shell houses from a manufacturer in unassembled packages consisting of all lumber, roofing, doors, windows and similar materials necessary to complete a shell house. Upon commencing operations in a new area, Barenboim buys or leases land as a site for its local warehouse, field office, and display houses. Sample display houses are erected at a total cost of \(30,000 to \)40,000 including the cost of the unassembled packages. The chief element of cost of display houses is the unassembled packages, in as much as erection is a short, low-cost operation. Old sample models are torn down or altered into new models every 3 to 7 years. Sample display houses have little salvage value because dismantling and moving costs amount to nearly as much as the cost of an unassembled package.Instructions

  1. A choice must be made between (1) expensing the costs of sample display houses in the periods in which the expenditure is made and (2) spreading the costs over more than one period. Discuss the advantages of each method.
  2. Would it be preferable to amortize the cost of display houses on the basis of (1) the passage of time or (2) the number of shell houses sold? Explain.

E2-4 (L03) (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows.

Relevance Neutrality Verifiability

Faithful representation Completeness Understandability

Predictive value Timeliness Comparability

Confirmatory value Materiality Free from error

InstructionsIdentify the appropriate qualitative characteristic(s) to be used given the information provided below.

(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.

(b) Quality of information that confirms usersโ€™ earlier expectations.

(c) Imperative for providing comparisons of a company from period to period.

(d) Ignores the economic consequences of a standard or rule.

(e) Requires a high degree of consensus among individuals on a given measurement.

(f) Predictive value is an ingredient of this fundamental quality of information.

(g) Four qualitative characteristics that are related to both relevance and faithful representation.

(h) An item is not recorded because its effect on income would not change a decision.

(i) Neutrality is an ingredient of this fundamental quality of accounting information.

(j) Two fundamental qualities that make accounting information useful for decision-making purposes.

(k) Issuance of interim reports is an example of what enhancing quality of relevance?

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